What is a 'Non-Compete Agreement'

A non-compete agreement is an agreement between an employer and an employee in which the employee agrees not to use information learned during employment to enter into competition in subsequent business efforts. 

BREAKING DOWN 'Non-Compete Agreement'

Non-compete agreements usually state that the employee cannot enter into certain professions which would be considered to be in competition with their current employer for a specified period of time and/or within a specified geographic area. This sort of agreement can also be called a "covenant not to compete" or a "restrictive covenant."

Employers usually insist on non-compete agreements because of the possibility that an employee, upon termination or resignation, will work for a competitor or start a business. The employee might then gain a competitive advantage over their former employer by abusing confidential information about their former employer's trade secrets or sensitive information such as business practices, upcoming products, marketing plans and customer or client lists. These agreements can also be enforced to prevent former employees from entering into work in a similar industry, even if that work would not involve the disclosure of trade secrets. 

Non-compete agreements are distinct from non-disclosure agreements, which would not necessarily prevent an employee from working for a competitor but would prevent the employee from revealing information the employer considers to be proprietary or confidential, such as client lists, underlying technology, or information about products in development. 

Non-Compete Agreements in Context

A common example of non-compete agreements is with media personalities: a television station could be legitimately worried that a popular meteorologist could siphon viewers away if the meteorologist began working for a rival station in the same state. In most jurisdictions this would be considered reasonable cause to sign a non-compete agreement. 

In the U.S., the legal status of non-compete agreements is a matter of state jurisdiction. States vary widely in their enforcement and recognition of non-compete agreements, and many state legislatures have undertaken recent debates and updated legislation related to non-compete agreements. With a few specific exceptions, California does not recognize non-compete agreements at all. Hawaii passed a law in 2015 barring high-tech companies from asking their employees to sign non-compete agreements; the following year Utah passed a resolution stating that new non-compete agreements may not last for more than a year.

Most states adopt some sort of standard holding that a non-compete agreement must not be egregious in length of time or geographic scope, and shouldn't meaningfully restrict a worker's ability to find employment; however, jurisdictions differ widely in interpreting what terms of a non-compete agreement would be overly onerous.

  1. Terms of Employment

    Terms of employment are conditions that an employer and employee ...
  2. Trading Partner Agreement

    A trading partner agreement is an agreement drawn up by two parties ...
  3. Special Employer

    A special employer is an employer who receives an employee on ...
  4. Severance Package

    If an employer offers a combination of pay and benefits to workers ...
  5. General Employer

    A general employer is an employee’s original employer in the ...
  6. Option Agreement

    An option agreement is a legal contract between two parties outlining ...
Related Articles
  1. Personal Finance

    Why Just Half of Americans Got a Raise This Year

    Just half of Americans got a raise this year, according to a new survey conducted by Bankrate for 2016. Here are some of the reasons for such a low figure.
  2. Financial Advisor

    How to Launch a Wealth Management Firm

    Opening a wealth management firm is a complex process. By keeping these rules in mind, financial advisors can increase the odds of success.
  3. Personal Finance

    What's Your Employee Value?

    Have you ever wondered how much you're worth to your boss? Here's a method for calculating that value.
  4. Managing Wealth

    The layoff payoff: A severance package

    If you must leave your job, go out fighting for the best benefits you can get.
  5. Retirement

    Is Your 401(k) Administrator Competent?

    The more that employees know about their employee 401(k) plans, the better. But what doesn't your administrator know?
  6. Financial Advisor

    Beware Of Company Stock In Qualified Plans

    While this strategy does have a few advantages, it can also pose some substantial risks to employees.
  7. Managing Wealth

    Top Job Perks You May Not Have Heard Of

    Companies are becoming increasingly creative with their benefits packages, in order to attract younger employees.
  8. Small Business

    Hiring? Regulations Small Businesses Need to Know

    When a small business becomes an employer, it has new responsibilities. Make sure you familiarize yourself with regulatory requirements.
  9. Retirement

    The Rise of the Semi-retired Life

    The number of people leaving the workforce to become semi-retired, instead of fully retired, is growing. Here is a look at the reasons and options.
  10. Managing Wealth

    5 Low-Cost Perks for Small Business Employees

    Money isn’t the only way to motivate employees. Here are some savvy strategies even the smallest business can use.
  1. How do I "vest" something?

    Vesting is a term usually related to pension plans that some employer's provide to their employees.An employer may make contributions ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center